When planning for the distribution of assets after one’s passing, it is important to understand the distinctions between a will and a trust.
Although both serve as legal documents designed to dictate the distribution of property and assets, they operate in different ways.
Will defined
A will is a legal document that outlines the desired distribution of a person’s assets upon their death. In a will, individuals can specify who will inherit their belongings, appoint guardianship for minor children and name an executor to oversee the distribution. A 2020 survey found that only 46% of Americans had a will.
Characteristics of a will
A will does not take effect until the person who created it dies. Wills generally go through probate and become a matter of public record. They are flexible and the creator can change them at any time in their life. The creator of a will can designate legal guardians for their minor children.
Trust defined
A trust is a legal arrangement in which a person called the grantor transfers assets to a trustee to hold and manage for the benefit of one or more beneficiaries. A grantor can establish a trust during their lifetime or upon their death.
Characteristics of a trust
A trust can take effect immediately. The trustee can begin managing and distributing assets while the grantor is still alive. Unlike wills, trusts do not go through probate and their details remain confidential. The trustee manages and distributes assets according to the terms of the trust. This can happen even if the grantor becomes seriously ill or injured. Trusts offer tax advantages and can minimize estate taxes.
Wills and trusts are both useful. Understanding the differences helps you choose which is right for you.